Budget Finance

GDP growth in Q4 likely to moderate to 6.1-5.9%, may lead RBI to cut rates

The country’s economic growth in the fourth quarter ended March 2019 is expected to moderate to 6.1-5.9 per cent, which could pull down growth rate for the entire fiscal 2018-19 to below 7 per cent, according to a report by SBI.

The slip in GDP growth may force the Reserve Bank of India to move with a deeper 0.50 per cent cut in rates at its next review to propel the sluggish economy, the SBI Ecowrap report said Monday.

The growth could come at 6.1-5.9 per cent for the January-March period, getting the full-year growth to 6.9 per cent, an estimate by the economic researchers at the country’s largest lender SBI ahead of the announcement of official data on Thursday, said.

“We expect GDP growth for Q4FY19 at 6.1 per cent. GVA (gross value added) growth could be at 6 per cent or slip marginally below 6 per cent at 5.9 per cent. FY19 GDP growth will be at 6.9 per cent,” it said.

However, it added that the current slowdown can be “transitory” if proper policies are adopted in the interim.

Calling out the high real interest rates — the differential between the policy rate and headline inflation — as an impediment to investment, it said the RBI can cut rates by 0.35-0.50 per cent at its next policy announcement.

The RBI’s larger rate cut can be effective only if transmission of the rates happens quickly, it said, suggesting a few factors that the central bank needs to keep in mind while delivering a rate cut.

Pointing out to the cumulative rate cuts of 0.50 per cent by the Reserve Bank of India (RBI) since February, the note said the median marginal cost of funds-based lending rate by banks has moved down by only 0.07 per cent.

The first will be to ensure adoption of external benchmark rate which moves in with the RBI’s repo rate.

“Ensure that asset and liability side of the banks move in tandem and ensure repo rate is directly benchmarked to external benchmark/non-volatile bank liabilities/CASA that is mostly used for transaction purposes,” it said.

Otherwise, it would continue to be constrained by lack of transmission, even as the RBI will continue to cut rates, it said.